A New, and Viable, Cost Model

Feb. 17, 2011
Achieving competitiveness and withstanding future market fluctuations.

The positive signs that U.S. economy is improving are broader and more frequent than anytime in recent memory. A Q4 2010 survey by the National Association for Business Economics (NABE) showed that 42% of companies interviewed expect to boost jobs in the next six months, up from 29% in the first three months of 2010. To put these gains in perspective, the survey found that the gap between hiring and firing plans widened to the highest level since 1998.

While that certainly is good news, the first-hand reports I’ve been getting from metalcasters, fabricators, weld shops, and other traditional, mid-market manufacturing businesses is still one of considerable caution. Their business is picking up, but their hiring is lagging well behind the general economy. I believe that may not be such a bad thing — at least for the near term.

For mid-market manufacturers to take full advantage of the renewed economic strength they need to understand that the business and cost models that allowed them to prosper at the top of the last cycle are no longer viable. Many have lost business to China and other offshore locations. Simply adding labor to improve output is an outdated business model. Offshore competitors have a cost-per-hour for labor that is a fraction of comparable U.S. labor.

The challenge is to deliver the quality and service that customers demand at a price that’s in line with offshore competition. If successful, metalcasters can achieve a level of competitiveness that will make them more able to withstand future market fluctuations, and put them in position to win back business lost to offshore competition.

The biggest step in the equation is to offset the disparity in labor costs with capital investment in automation. With robotic automation now far more prevalent and understood beyond its roots in the automotive market, it is a very viable option for small to medium-sized operations. And, with the rise in the cost of offshore labor, properly deployed robot-based automation has an operating cost that is equal to or better than offshore labor, with far more flexibility.

The benefits of robotic automation are numerous and touch almost every aspect of a production operation. Increased productivity, improved quality, more efficient use of materials, less scrap and improved production flexibility are just the beginning.

The ROI on the purchase and installation of a robotic system is typically realized in less than two years, when factoring in these benefits plus the savings on labor, net of that needed to program and operate the system. With the hourly operating cost (mostly electricity) of a robot at or below 60′/hour, the variable costs, including periodic maintenance, are astonishingly low. And, once the ROI is achieved the savings add up quickly.

Diecasting provides a good example of how a manufacturer can benefit from robotic automation. Robotic unloading of diecastings is common, and automating the secondary processes, though more involved, provides even greater efficiency by improving quality and reducing labor costs. Trimming, cutting, removing gates and flash, grinding and polishing – all of these processes can be performed by robots with higher yield and higher quality than manual operations.

Through one of two basic cell designs diecasters can deploy flexible cells capable of handling a mix of parts, which can be moved from dies into cells dedicated to gate and flash removal, grinding, polishing and packing. Or, multi-function cells can be organized around each diecasting machine, with each part unloaded and, in a single cell, taken through all the secondary processes as needed.

The choice will be based on the specific product mix and the flow of secondary processes. To determine which direction is best, a prospect should engage a simulation study to balance the material flow and cycle times to determine the best approach. A good automation integrator can help with this.

Joe Campbell is a 30-year veteran of the robotics industry, having served with robot manufacturers, engineering firms and system integrators, and has provided strategic consulting in operations, strategic development and marketing. As vice president of ABB’s US Robot Products Group, he is responsible for technical support and production, sales, and marketing.

When it comes to the loss of business to China, there is a trend for some manufacturing returning to the United States. Often called “on-shoring’ or “re-shoring,” this recent development is driven by the increase in Chinese wages and the cost of shipping materials back to the U.S., coupled with growing frustration of long lead times, large lot sizes, and the difficulty to make even the most minor product changes. Simply put, the move to offshore manufacturing has come at the expense of control and flexibility.

Additionally, the period between the outlay of cash for the incoming product and the payment from the end customer can be as long as 180 to 225 days, causing an ongoing stress on cash flow. And recently some companies have had trouble protecting their intellectual property from such a long distance.

By using robotic automation to close the value gap, the benefits of “off-shoring” will erode and the “re-shoring” trend will become more pronounced. In addition to the renewed cost competitiveness, U.S. metalcasters can leverage their ability for shorter lot sizes, faster lead times and quicker responsiveness to solidify their customer relationships.

This transition to robotic automation isn’t without challenges. Introducing new technology means that employees need to learn new skills and new processes. And, though there is usually a short-term reduction in the workforce, the increased efficiency and productivity typically spurs sustainable business growth that adds to the workforce over the long run. The jobs that are gained are more rewarding and have opportunities for advancement that far surpass those of the jobs that were lost.

The results from robotic automation provide very real, sustainable value that will help metalcasters to win new business while making it much more difficult for offshore competitors to offer an attractive alternative

The global economy, while still very much evolving, is mature in many respects; with that maturity comes opportunities and risks that need to be understood and embraced. With solid strategic planning, and good, well-founded decisions, efficient business models can be established that help metalcasters and other manufacturers to become more competitive.

Automation is clearly a critical step in the plan.